1. In this case , at the instance of the revenue, the following two question have been referred to us for our opinio :
'(1) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the commission charges of Rs. 27,383 received by the assessee from its mmembers were exempt under section 80P(2)(a)(iii) of the Incommme -tax Act, 196
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the amount of Rs. 1,46,838 being interest, godown charges, insurance charges and the amount of Rs. 8,284 being rebate on insurance charges, represented recoveries attributable to the activities of marketing of the agricultural produce of the members and were exempt under section 80P(2)(a)(i) of the Income-tax Act, 196 ?'
2. The assessment year under reference is 1970-71, the relevant previous year being the year ending 31 st October, 1969. The assessee is a co-operative society constituted under the provisions of the Co-operative Societies Act. It derives income from ginning and pressing of cotton received from its members and others and it also carries on activities of marketing cotton. The question arose before the ITO whether the commission earned by the assessee-society for marketing the cotton of its members would be exempt under s. 80P of the I.T.Act, 1961, the incomme being commission charges received by it from its members. The ITO held that this exemption was not available to the assessee-society on the ground that the cotton marketed by the society ceased to be the agricultural produce on account of process of ginning and pressing and, secondly, besides the members of the assessee-society, others also gave cotton to the assessee and, therefore, the cotton marketed by the assessee was not the cotton belonging to the members of the asseessee-society. On appeal by the assessee, the AAC disagreed with the view of the ITO and held that the society was entitled to the exemption in respect of the commission on marketing the cotton of its members. On appeal by the revenue against the decision of the AAC, the Tribunal unpheld the decision of AAC and dismissed the appeal on this point.
3. The assessee credited in its account two amounts, namely , Rs. 1,46, 838, being interest, insurance charges and godown charges and Rs. 8,284, being rebate on insurance charges. These amounts were credited by the assessee-society to the members' trading account at head office and at different branches. It was contended on behalf of the assessee before the officer that these items were attributable to the activities of marketing the agricultural produce of members and as such exempt under s. 80P(2)(a) of the I.T.Act, 1961. It was pointed out before the ITO in this connection that these amounts represented additional charges as well as recoveries from customers whenever delivery of goods was taken later than the agreed date. The rate of interest was abouut six per cent. but certain cases it varied between 15 to 20 per cent. to cover godown charges, insurance charges, ect. The ITO was of the view that these amounts could not from part of the sale price but represented amounts charged by way of penalty or charges, ect. for withholding the payment and, therfore, taxable as income not forming part of the sale of agricultural produce. The ITO accordingly brought to tax the said amounts in computing the total income of the assessee-society. On appeal by the assessee, the AAC disagreed with this view of the ITO and held that the ITO was not right in his view. According to the AAC, these charges were recovered from nobody else but only from the customers and included in the cotton invoices made out for the sale of cotton It represented amounts by way of interest. godown charges, insurance, ect., for delayed deliveries being taken. The amount, therefore, represented recoveries attributable to the activities of marketing of agricultural produce of the members. In this connection, it is worthwhile nothing that the assessee-society charges to the traders of cotton who have purchased cotton from the society interest at the rate of 1 1/2 per cent. per month if payment is made beyond a particular date and this interest is known as'carrying charges'.
4. Against the decision of the AAC, the revenue took the matter to the Income-tax Appellate Tribunal and the Tribunal upheld the conclusion of the AAC. According to the Tribunal, these amounts were received either by way of interest of godown charges for the payments made by the members. These amounts, in its opinion ,could not be divorced from the main source, namely, the sale proceeds received from the members. If any member were to make good the payment within the due date, he or it was required to pay the sale price. In the case of delayed payments, however, the society would recover interest as well as godown charges over and above the sale price. This is the normal commercial parctice in cases where, according to the Tribunal, goods are sold on credit and the customers do not pay their outstanding by the due date. The Tribunal, therefore, agreed with the AAC that the impugned amounts were exempt under s. 80P(2)(a)(i) of the Act. The insurance bonus was nothing but recovery of insurance charges paid by the assessee which formed part of the expenditure incurred by the society in the course of it business which was found to be exempt from tax. The Tribunal, therefore , dismissed the revenue's appeal so far as this amount was concerned. Thereafter, at the instance of the revenue, the two questions hereinabove set out have been referred to us for our opinion.
5. As question No. 1indicates, the amount of Rs. 27,383 represented the commission received by the assessee-society from its members in respect of sales of cotton belonging to the members of the society. It must be pointed out that the assessee-society is what is known as an 'apex society' or a federating society where there are individual members as well as some other co-operative societies who are members of the assessee-society. The assessee-society gets raw cotton not only from the individual members but also from its society members, that is , co-operative societies who are members of this apex society.
6. section 80P is one of the sections in chap. VI-A where several sections have been set out providing for cases of deduction to be made in computing the total income. Section 80P deals with deductions of income in respect of income of co-operative societies, and under sub-s.(1 :
Where, in the case of an assessee being a co-operative society, the gross total income includes any income referred to in sub-section (2) there shall be deducted, in accordance with and subject to the provisions of this section, the sums specfied in sub-section (2), in computing the total income of the assessee.'
7. Under sub-s. (2) the sums referred to in subs. (1) shall be the followin :
'(a) in the case of a co-operative society engaged in-....
(iii) the marketing of the agricultural produce of its members, or.... the whole of the amount of profits and gains of business attributable to any one or more of such activities.'
8. The rest of the provisions of s. 80P are not material for the purposes of this judgment. Now, raw cotton, when it is brought to the assessee-society, consists of unginned cotton. In the process of ginning, cotton seeds are separated from cotton wool as it is called, or cotton fibre and thereafter cleaned cotton is pressed into bales so as to be available for selling to purchasers. The process of ginning would vield income on its own but marketing of ginned and pressed cotton would yield income under a different head. If the co-operative society earns income from the marketing of the agricultural produce of its members, then the profits and gains of business attributable to that marketing activity would be deductible under s. 80P(2)(a)(iii) read with the rest of the provisions of s. 80P(2)(a). In CIT v.Broach District Co-Operative Cotton Sales, Ginning and Pressing Society Ltd. : 97ITR575(Guj) , where this High Court was concerned with the identical prvisions of s. 81(i) of the I.T.Act, as it stood prior to 1968,it was held that under s. 81(i) of the I.T. Act. read with the proviso, exemption was granted to such profits and gains arising from the business activities of a co-operative society as might fall withinn cls. (a) to (f) of s. 81(i) . If a society carried on certain activities which were exempted and certain activities which were non-exempted, the profits and gains attributable to such non-exempted activity must necessarily be taxed. Where a co-operative society which was engaged mainly in the marketing of cotton, carried on ginning and perssing of cotton with the aid of power as an ancillary to its marketing activities, it was held by this court in the case of Broach District co-operative society : 97ITR575(Guj) that the income of the assessee from ginning and pressing with the aid of power was not exempt under s. 81(i)(c) of the Act. In that particular case, it was held that the marketing of agricultural produce of its members.
9. So far as ' marketing ' is concerned, it is nowhere defined in the I.T.Act nor are the words 'agricultural produce' defined anywhere in the Act, but in CIT v. Gujarat State warehousing corporation : 124ITR282(Guj) , a Division Bench of this High Court has held that the word 'marketing ' signifies bringing or sending to the market and includes buying and selling.
10. After considering the various definitions and reference books it has been pointed out that the marketing process was infinitely far-reaching than the transfer of goods from manufacturers to final consumers. A common but fallacious theory was that it was concerned chiefly, if not wholly, with finshed goods and was the activity of a specialised class of middlemen or that it was limited to adding time, place and possibly possession utilities to completed goods. ' Marketing ' includes all business activities directed towards the flow of good and services from producer to consumer, and they were within the concept of 'marketing ' and the term could not be restricted only to buying and selling activity. If the narrow meaning were accepted, the whole purpose of the Legislature would be frustrated. Under these circumstances, so far as the two questions referred to us are concerned, the concept of 'marketing' will have to be interpreted as all activities connected with process of taking over from the agricultural-producer-member and handing over the marketable commodity to the purchaser and all the intermediate processes would be connected with 'marketing' of the agricultural produce of the members.
11. The ITO in this case was of the view that once the raw cotton was ginned and therafter pressed, it ceased,to be agricultural produce and, therefore, the commission earned by the assessee-society from the sale of ginned and pressed cotton of its members was not income derived by the assessee-society from the activities attributable to the marketing of agricultural produce of its members. Mr. Raval,appearing for the revenue, before us . In support of his contention, he relied upon the decision of the Madras Hiigh Court in South Arcot District Co-operative Supply and Marketing Society Ltd. v CIT : 97ITR500(Mad) , where a Division Bench of that High Court held that once paddy was hulled and rice was taken out as a result of the hulling process, it ceased to be agricultural produce and the income derived by the co-operative society from the sale of rice was not income attributable to the marketing of agricultural produce of the members. Similar view was also taken by a Division Bench of the Madhya Pradesh High Court in CIT v. Mahasamund Kissan Co-operative Rice Mill & Marketing Society Ltd. : 103ITR499(MP) . With great respect to the learned judges of the Madras High Court and of the Madhya Pradesh High Court, we are unable to agree with their conclusions as regards rice, it is with a view to make it a more easily saleable commodity, and it does not cease to be an agricultural commodity or agricultural produce. We are not concerned under s. 80P with the question of agricultural income. What we are concerned with is that the exemption granted to Co-operative societies is with a view to encourage the Co-operative sector and it is with a view to encourage the Co-operative hebit that special exemptions are granted under s. 80P(2) and it is in that concept that the question of agricultural produce has to be construed. Commonly understood, rice would be agricultural produce and that is why, with the utmost respect to the learned judges of the Madras High Court and the Madhya pradesh High Court who decided those two cases, we are unable to agree with their conclusion.
12. Even if our conclusion regarding rice is not correct, so far as ginning and perssing of raw cotton is concerned, all that happens is that in the ginning process the seeds are separated from the lint or cotton -wool so that cotton-wool or lint when sold to the purchaser will be available for use in the spinning process or for any of the multiple uses to which cotton is being put. Merely separating cotton seeds from the cotton lint would not render cotton lint any the less an agricultural produce. For example,when groundnut in shell is decorticaticated and groundnut seed is taken out,the groundnut seed would still be an agricultural produce and merely because decortication has been gone through it would not cease to be an agricultural produce. Similarly, when corn wheat or bajra or juvar are taken to the threshing floor and the grain is separated at the threshing floor and ultimately the grain as distinct from the chaff is taken out, it would not cease to be an agricultural produce merely because the process of separating grain from chaff has been gone through. It is the commonly understood meaning of the words 'agricultural produce ' that has to be adopted in this case because the Legislature itself has not given any indication of what is meant by the term ' agricultural produce ' used in s. 80P(2)(a)(iii).
13. Under these circumstances, we are unable to accept the contention urged on behalf of the revenue by Mr. Raval that raw cotton, after it was ginned and cotton seeds were separated and cotton lint was pressed into bales, ceased to be agricultural produce.
14. It was further argued by Mr. Rawal that the assessee-society before us is an apex society or a federating society and not only the individual members bring their own raw cotton but even the federating societies who are members of the assessee-society were bringing cotton of their respective members to the assessee-society for the purpose of being ginned and pressed and ultimately sold. He contended that so far as cotton brought to the assessee-society by its member-societies was concerned, it would not be said to be agricultural produce of its members. Now, the words in the section are not ' agricultural produce grown by its members ' but 'agricultural produce of its members '. So long as the commodity brought to the assessee-society is agricultu ral produce and so long as that agricultural produce belongs to its members, it would be enough to say that that is the agricultural produce of its members, be the member a co-operative society in itself or an individual member. The concept here is of the ownership of an agricultural produce and not of the person who grows the agricultural produce. Under these circumstances, this contention urged on behalf of the revenue must also fail.
15. Question No. postulates that the amount of Rs. 27,383 was received by way of commission by the assessee-society from its members for the sale of cotton ginned and pressed by it and hence it is clear that it was profits and gains of business carried on by the assessee-society from the activity of marketing the agricultural produce of its members and, therefore, the entire amount of Rs. 27,383 would be deductible under the provisions of s. 80P(2)(a)(iii).
16. Coming now to the question of interest, godown charges, insurance charges and rebate on insurance charges set out in the question referred to us, it must be observed that in the course of marketing the ginned and pressed cotton, the assessee-society recovers from the purchasers who purchase goods from it, interest charges, godown charges, insurance charges and also recovers rebate on insurance charges and all these receipts are attributable to the marketing of cotton of its members. It is while carrying on the activity of marketing, that these different amounts are received by the assessee-society and, therefore, the amount of Rs. 1,46,838 and the amount of Rs. 8,284, are both parts of profits and gains of business attributable to the activity of marketing the agricultural produce of the members of the society. With respect to the Tribunal, it would not be correct to say that these amounts would fall under s. 80P(2)(a)(i) because sub- clause (i) of s. 80(P)(a) refers to providing credit facilities to its members. Here, these interest charges, etc., are not recovered from the members. The orders of the ITO and of the AAC make it clear that these interest charges, etc., are recovered from persons who purchase cotton from the assessee-society and then payment of the price of the cotton purchased from the society is made and it will be by the purchaser that the interest is paid. Similarly, if goods are stored on account of the purchaser, the purchaser pays commission charges and he also pays insurance charges for covering insurance risk over the goods purchased by him. It is under these circumstances that these amounts of Rs. 1,46,838 and Rs. 8,284 were received by the assessee-society as part of its marketing activity or in the course of its marketing activity while marketing cotton belonging to its members. Hence, it was rightly held by the Tribunal that these receipts being part of the profits and gains of the business attributable to the activity of marketing of agricultural produce of the members of the society were deductible. Reference to s. 80P(2)(a)(i) is rather unfortunate because of some misconception on the part of the Tribunal.
17. Under these circumstances, we answer the questions referred to us as follows :
Question No. 1. - In the affirmative, that is, in favour of the assessee and against the revenue.
Question No. 2- In the affirmative, except that they were exempt under s. 80P(2)(a) instead of being exempt under s. 80P(2)(a)(i) of the I. T. Act, 1961. The Commissioner will pay the costs of this reference to the assessee.